The U.S. economy finally appears to be picking up steam and headed toward recovery: several economic indicators -- including manufacturing and services output, and sales of cars and consumer goods -- have shown noticeable improvement over the last few months. Scan virtually any financial news website, and you'll see it's now a consensus that a sustained economic recovery has not only arrived -- it's picking up speed.
But there's good reason to believe that the labor market won't be keeping pace. Rather than an aberration, high unemployment may be an enduring feature of the United States' economy.
We are, sadly, in a very deep pit when it comes to the labor market. The recent private-sector estimate from ADP Employer Services announced the creation of 297,000 new jobs for December, but this is the first instance of a real dent in the jobless rate since the beginning of the recession. The November report from the U.S. Bureau of Labor Statistics pegged the unemployment rate at 9.8 percent, which translates to over 15.1 million unemployed. Over 40 percent of currently unemployed workers have been out of a job for over six months, the highest percentage of long-term unemployment since World War II. The numbers look even worse if we consider the underemployed, which includes potential workers who have given up looking for a job or the 9 percent of the labor force that is made up of part-time workers who would prefer to be working full-time. At least 2.5 million people gave up looking for work in the last year alone.
Even if the December rate of job creation continues, it will be 2014 before unemployment is down to 5 percent. But last month's good news may not last. At a more conservative estimate of 150,000 jobs added per month, it could be 2024 before employment is back to 2007 levels. Keep in mind that there are 100,000-plus estimated new entrants into the workforce each month. In November, a sum total of 92,000 new jobs were created -- but that didn't lower the unemployment rate.
So what happened? Why have American labor markets ended up in such a dire situation?
The simple Keynesian explanation for the initial unemployment is that aggregate demand -- the country's combined spending and investment -- has been too low. But it's unlikely that spending is the only problem, as unemployment is too high and too persistent relative to similar episodes of disinflation in recent history. If weak demand was the main problem, profits should be collapsing too, but they are not. Investment and corporate profits have been fine for some time now, and they are broadly within the range of pre-recession estimates.
There's a second problem with the Keynesian story, which relies heavily on the notion that real, inflation-adjusted wages are sitting at too high a level. If unemployment causes someone real suffering, why wouldn't he or she be willing to take a lower salary to get a job and ease the pain? But rather than falling, private-industry wages are currently on the rise -- up nearly 60 cents per hour since the end of the recession. There are plenty of good theories why it is hard to cut the wages of employed workers -- long-term contracts pose legal challenges, and fragile worker morale threatens to collapse under the stress of wage cuts. But it's harder to explain why unemployed workers can't find new jobs for less pay, especially if output is recovering, profits are high, and corporations are sitting on a lot of cash.